Benefits Buzz

Safe Harbor Eligibility Test for Premium Only Plans

Posted on November 13th, 2019

Premium Only Plans (POP) can generally be defined as a type of Cafeteria Plan where the only pre-tax benefit available to employees are for those of insurance premiums. When non-taxable benefits are involved, the IRS will usually have some strict rules in place that must be followed. For Cafeteria Plans, these are referred to as non-discrimination rules, and these rules are in place to ensure the plan doesn’t discriminate in favor of highly compensated and/or key employees. 

There are three different non-discrimination tests that must be passed relating to 1) eligibility, 2) actual contributions and benefits, and 3) key employee concentration. These are rather sophisticated and complex tests that need to be performed, and employers usually have to rely upon a third-party to conduct the testing.

But there is some good news for POP plans! 

Employers will get an automatic pass of the three non-discrimination tests if they can satisfy one simple requirement. If the ratio of non-highly compensated employees participating in the POP plan compared to the ratio of highly compensated participating in the POP plan is 50% or greater, the employer will be treated as passing all of the non-discrimination tests. 

Okay, maybe that sounds complicated, but it’s actually pretty simple to understand once you’ve seen an example. The following information applies to XYZ Company:

  • 100 non-highly compensated employees
    • 60 participate in the POP plan (60 / 100 = 60%)
  • 30 highly compensated employees
    • 25 participate in the POP plan (25 / 30 = 83.33%)

We’re not done yet. 

There is one more math problem to calculate:
60% / 83.33% = 72.03%

72.03% is greater than 50% so XYZ Company automatically passes the three non-discrimination tests.

It would probably be more appropriate to say XYZ Company does not have to conduct the tests relating to contributions and benefits or key employee concentration because the IRS is comfortable that enough non-highly compensated employees are eligible and participating in the POP plan.
Employers that satisfy the 50% ratio are considered to have met the POP plan “safe harbor test for eligibility.” If the ratio is less than 50%, the employer doesn’t necessarily fail the non-discrimination testing. They might even be able to pass this test with a ratio that is less than 50%. The ratio to pass actually gets smaller as the concentration of non-highly compensated employees participating in the POP plan increases. However, at a high level, understand that a ratio of 50% or greater will guarantee a pass for any employer.  

One last do you determine which employees are considered highly-compensated? According to IRS, a Highly Compensated Employee can be defined as:

  • An officer of the company;
  • A shareholder owning more than 5% of the Employer; or
  • An employee who, during the preceding year only, received more than $125,000 in compensation

Employees who do not fit any of these criteria would be considered non highly-compensated.

Have a question about Premium Only Plans or Non-Discrimination Testing?


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